Spot Trading in Crypto: Beginner’s Guide to Safe & Long-Term Investing

Introduction

Whether you're just buying crypto and holding or starting to explore leverage trading and shorting and longing with futures, uh, understanding the difference between spot and futures is absolutely crucial. Today, we're going to break it all down, the risks, the rewards, and which style may just fit your strategy. Be sure to like and subscribe to the channel if you have not already. My name is Paul Samson, and this is Data Dash.

What Is Spot Trading

So, first thing up folks is spot trading. Uh, which in crypto specifically, here's the overview of it. Essentially, you actually own the actual asset. Example is Bitcoin, Ethereum, Salana, whatever the coin of your choice is. You physically can not necessarily hold it, but you can transfer it to your own personal custody. You can hold on to it via Coinbase, Crypto.com, other exchanges that hold the asset for you, custody it on your behalf as well with pretty much 24/7 access. And you're able to actually transfer those assets to pretty much anywhere you'd like, another wallet, whether it be a cold storage wallet that you hold uh off of exchanges, which is preferred for long-term investing. It's pretty much like having either cash in your personal safe or gold bars uh where you can actually transfer these things, protect them yourself. So obviously you want to do your homework when looking to custody your own assets in that case.

No Liquidation Risk

Um but with that being said, you also have no liquidation risks. And what liquidation is? Liquidation is when you attempt to trade or purchase an asset such as crypto. Essentially you put leverage behind it. So when you take a $1,000, for example, and you put five times the leverage behind it, you're essentially borrowing up to $5,000 from that exchange you're looking at and you have only $1,000 of equity in that trade. And basically once you lose, whether it's on the long side, meaning that you're purchasing, expecting the price to accelerate to the upside for you to benefit from that trade or that move, or if you're shorting the market where you come in anticipating the market to actually pull back. A lot of people will utilize this as a hedge position uh to actually make money on the downside. But in the case of liquidation, that means that you will actually either lose all of the capital you put into that uh trade or that investment essentially if you were to put leverage behind it. And uh in the spot world that is not a thing, right? You have basically a 100% draw down at the end of the day. Meaning that if you buy something for $1,000 today and it drops 20, 30, 40, 50, 60, 70, even 90%, you still will have the allocated amount that you purchased and then you can either decide to hold it till it comes back up, you know, in that sense, or you're not at risk of it pulling back 20% overnight, which cryptos are notorious for, and essentially liquidating you if that was the case, even on a 5x leverage, because basically you would only have 20% to to put you at a 100% liquidation point if you were on a 5x trade. And we'll get into the futures trading in a second, but yeah, the liquidation is essentially when you you can lose the money that you invest completely.

Buying and Holding Crypto

Now, in the case of spot buying and trading, that is just where you come in and you put in whatever amount you want into that asset. And depending on what it is, if it's Bitcoin at $100,000 and you put in $1,000, you're going to get 0.01 Bitcoin and you get to hold on to that and whatever the valuation of that is against dollars will increase or decrease or your currency wherever you are in the world uh as the time progresses.

No Time Constraints

There are also no time constraints with spot buying, meaning that in the world of trading, uh once you get involved with some of these futures and things of that nature, uh there are times where the overall stock market or the futures market that is is open, a lot of times that tracks with the overall traditional finance market where they'll close over the weekend. Sometimes they'll close overnight depending on which exchange uh you are looking for. A lot of times it's a forex exchange that will have those time constraints. some of the more recent crypto exchanges don't necessarily put those on. But for example, if even if you were trading on Coinbase futures, uh you will be subject to the times that they are closed, which is a lot of times after 5 till 7:00 p.m. Eastern. Then once again over the weekends on holidays when you are purchasing in spot, you don't deal with any time constraints. You have full access to your uh assets, to your investments, and you're able to really do what you want uh anytime you want.

Dollar-Cost Averaging

And spot trading in general is best for the long-term investors for DC Averaging, which means dollar cost averaging. So when you get these larger pullbacks in the market and these times where the market corrects over uh periods of time, you can start to purchase those assets at a lower rate than you originally did and it brings down your overall cost basis so that once the market does recover, uh you have essentially scaled into a lower uh price point and then once it recovers, you have a higher upside potential as well as lower risk tolerance.

Pros and Cons of Spot

So some simple pros and cons as well for spot holding, buying, trading, investing, uh is that it's simple to understand. I I hope that uh it's pretty simple in that case, right? Where you just physically just buy something and you hold on to it and whether the price appreciates or depreciates is just the simple way that you'll be able to manage your uh allocation, right? So if you see the market drops 10% from the time you purchase, you know that you're down 10%. If it increases 100% or 50%, you know that you're up 50%. There's no guessing in there. there's no risk of losing everything unless something truly does go to zero. Um, you won't have to sweat these smaller 10, 20, 30% pullbacks.

Another pro is that it's obviously good for holding or yield strategies, which you can actually take your uh spot holdings and depending on which exchange uh has these abilities, but there are staking abilities uh where you can actually generate yield from your assets as they're just sitting there, right? So, uh Coinbase, for example, has this ability. some of the new ETF products are looking into it where you basically will hold your uh Ethereum, your Bitcoin, potentially Salana, things like that. USD uh C and it's very similar to how a bank would give you uh you know an APY percentage. Very interesting. Allows your money to kind of you work for itself while it's basically sitting there and also gaining value over the time when when the market does increase.

And then once again as a pro, there's no margin calls or liquidation. So margin call sim similar to a liquidation uh where you basically get you just lose everything you put into those trades because you're on leverage and with that being said the exchange will cut your position before they start to lose money. So whatever you put into those trades and if you amplify it with leverage uh whatever that initial dollar amount that you put in so once again if you put $1,000 in and you put on 5x leverage or 10x leverage you have to think about that in the sense of percentage loss. And if that 5x leverage goes against you 20%, that now puts you at 100% because it's 5x times the 20% that's 100% loss at that point. Same thing goes if you are to draw down 10% on a 10x leverage position. That now puts you at 100% loss. It's going to liquidate you. The exchanges will close out your accounts uh so that you are not at risk of basically going negative. Uh margin calls are the same aspect on a lot of the the stock market is essentially what you'll have those.

Limitations of Spot

Now the cons here are you cannot profit from downside moves in spot, right? This is a simple buy and hold strategy and if the market does pull back unfortunately you will bear the brunt of those pullbacks. So there's no way to benefit aside from selling exact highs, waiting for the pullbacks and then buying back lower, right? So uh that is just the case of buying and holding and then the strategy of that is that in theory you would uh appreciate over time. Now there's also no leverage which is going to mean that there's less capital efficiency. Truly, I don't think that that's really the best way to put it even because leverage to me is a tool that should only really be used by skilled traders. Um, and and we're going to cover that pretty heavily here. But yeah, for the for the spot trading, uh, there is no leverage added into it. And, uh, it does technically depending on if you have small capital, obviously, you can't put it to work as easily as you can when you come in with larger capital and just simply buy and hold for several years. And then, of course, depending on the amount that you're investing, it can be slower to accumulate wealth uh, over time or loss.